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Saturday, November 7, 2015

Why Should an NRI Open NRE or NRO Account?

Many of my NRI readers ask me frequently, should I open an NRI saving account in India?Is it must for an NRI to open NRE or NRO account? Can I continue my existing Saving account in India? etc. Well, If you are going abroad for short term let's say less than 6 months then you don't need to open an NRE or NRO savings account and you can continue to maintain your existing Resident Saving account in India, but you are going overseas for long term e.g. more than 6 months you must inform your bank about your NRI status and subsequently then will convert your Resident Saving account to an NRO (Non-Resident Ordinary) account.
Why is term important? because an Indian citizen is considered NRI for tax purpose if he spends more than 182 days abroad in a given financial year.If he spent less than 182 days in a financial year than he won't be considered NRI and will be treated like resident Indian, which also means that his global income will be taxed according to Indian tax laws i.e. you need to pay tax at rate of 30% if your global income is more than 10 lac, but I believe you can claim tax rebate if you also paid tax on abroad.

Now suppose you are going the USA for long-term or staying abroad for more than 1 year, then it's very important for you to open an NRE or NRO saving account in India unless you absolutely don't want to keep any money in Indian rupees.

Why Open an NRE or NRO Account?

Since many Indians always keep most of their money in INR and they also has an investment in Indian rupees e.g. fixed deposits, mutual funds, stock holding etc, it make sense for them to have bank accounts in India. Since you cannot keep your resident saving account once you become an NRI, you only have two options to open a bank account in India rupees, first NRE (Non Resident External) account on which you can only deposit foreign currency e.g. USD, GBP, or EUR and second NRO account (Non Resident Ordinary) on which you can deposit both foreign currency and Indian rupees. Any investment you make in India can be funded from these accounts.

Since you have to convert your resident saving account to NRO account once you become NRI. Now next question is whether you should an NRI open another NRE or NRO account, let's see what make sense.

If you want to open fixed deposit for investment then you should open an NRE account because interest earned on NRE account is tax-free in India. For example, if you open an FD of 5 lakh in India which becomes 10 lakh in 7 years then you don't need to pay any tax on maturity, even if you are not NRI at that moment. This is the big saving because interest earned on FD is taxable at the rate of 20% in both NRO and Resident Saving account.

If you have any income in India e.g. rental income or dividend income from stock which is in Indian rupees then you must need an NRO account because you cannot deposit Indian rupees on NRE account. Also remember, Indian income is taxable in India provided they are a more then exempted limit of 2.5 lakh, but remember, interest earned on NRO account is taxable in India.

You can also see the following table to understand the difference between NRE and NRO saving account to learn more and then open the account which better suits your need.

I hope you know now that why an NRI should open NRE and NRO saving account in India. I suggest all my NRI readers open both NRE and NRO accounts just for that purpose. Also, note to inform your bank when your NRI status changes e.g. you become Indian Resident to Non-Resident Indian and vice-versa, accordingly they will convert your resident saving account to NRO. If you decide to open the NRE or NRO account and confused between which bank is best to open these account, I suggest you read my post, Best Banks to Open NRE and NRO Saving account in India, and comments to get some idea.

The interesting thing is many Indians who travel to the UK for work are not aware of this requirement by Indian law and continue using their resident savings account, risking to get penalised by not converting to an NRI account (NRO/NRO).

We need to spread more awareness about this so people can convert their account suited to their residency status.

Hello nishee, he has to drop an email to bank employees, if they are not responding then he can simply close the account and open new NRO account with the bank who responds to call. He can open Kotak Mahindra NRE/NRO saving account right from UK online.